Keynesianism

The most important and influential policy prescription that followed from the depression is associated with Keynes, and calls for a policy of demand management. The cause of the depression lay in insufficient demand. Rectifying this might involve additional government expenditure, or redistributive measures to raise the incomes of those more likely to consume (in other words, lower-income groups). This prescription gave Keynesianism an egalitarian element. Keynes had already set out the practical implications of his stance before the outset of the depression, in a pamphlet written together with Hubert Henderson entitled Can Lloyd George Do It? In 1936, he provided a great theoretical and systematic synthesis, The General Theory of Employment, Interest and Money which became both an instant classic and an object of controversy.

The German and the Soviet experiments were both viewed with mixed feelings by Keynes, who recognized in military expenditure a form of demand creation, but also disapproved of both the methods and the ultimate goals of the National Socialist and communist leaderships. The country which came closest to realizing Keynes’s prescription in the 1930s was Sweden, where a political alliance between the parties representing labour and farmers carried out a demand-oriented and incomeraising policy. (Many of Keynes’s theoretical writings had in fact already been anticipated by Swedish writers: by Knut Wicksell and his disciples.) Agreements between union and employers’ organizations in 1938 (the Saltsjobaden Agreement) provided the foundation for a new social harmony.

With the benefit of hindsight, we can detect some of the Keynesian policy prescriptions as having been realized anyway in the 1930s as a product of much broader social and economic trends. One legacy of the war in every country had been a redistribution of income, and a narrowing of skill differentials. A new consuming class had been created. But for much of the inter-war period, it remained locked in conflict about wages and conditions of work. Eventually, in some countries agreements between employers and unions laid the basis for a subsequently much more harmonious development. The most striking instance, apart from Sweden, is the Swiss pact of 1937, which transformed previously very poor labour relations into a model for other countries to follow.